Manufacturing and services firms reported strong domestic and export growth to end 2014

The balances for businesses that tried to recruit staff were at an all-time high in Q4

John Longworth says that businesses are well placed to grow in 2015, but their optimism may not last if ‘political point scoring’ outweighs sound economic policies during the election campaign

Manufacturing and services firms reported strong growth to end 2014, according to the latest Quarterly Economic Survey (QES) published by the British Chambers of Commerce (BCC). Shrugging off recent signs of a slowdown, the manufacturing sector recorded increases in the balances for domestic sales (+36%, up from +23% in Q3), export sales (+26%, up from +16% in Q3), recruitment intentions (+85%, up from +73% in Q3) and turnover confidence (+62%, up from +60% in Q3).

The survey, made up of responses from almost 7,000 businesses, also shows that firms set out to recruit staff at an all-time high rate in the last three months of 2014. BCC’s Director General, John Longworth, says that firms’ strong performance at the end of 2014 could translate to a strong year of growth in 2015 – but this will depend on unwavering support for business throughout the general election and beyond.

Key findings in the Q4 2014 Quarterly Economic Survey:

In manufacturing, both domestic balances increased substantially; domestic sales (+36%, up from +23% in Q3) and domestic orders (+38%, up from +24% in Q3). However, these balances are still below the record highs recorded earlier in 2014.

In services, balances rose in Q4 after stagnating in Q3; domestic sales (+38%, up from +35% in Q3) and domestic orders (+33%, up from +29% in Q3).

An all-time high number of businesses have set out to recruit staff in the last three months, in both manufacturing (+36%, compared to +32% in Q3) and services (+32%, up from +28% in Q3).

The balance of manufacturing firms operating at full capacity rose by one point to +41% in Q4, while the number of service firms operating at full capacity remained consistent (+46%).

All export balances improved in Q4; manufacturing export sales rose by 10 points to +26%, while service export sales increased by one point to +22%.

A record number of manufacturers invested in training in Q4 (+39%, up from +32% in Q3) and a historically high proportion invested in plant and machinery (+36%, up from +29% in Q3).

In the manufacturing sector, the turnover confidence balance rose to +62%, five points below its last peak in Q1 2014. The service sector turnover confidence balance increased by two points to +60%, a historically high level.

Commenting on the results, John Longworth, Director General of the BCC, said:

“British businesses are well placed to grow in 2015 – a testament to their hard-work and resilience. It is particularly pleasing to see the manufacturing sector bounce back, despite signs of a slowdown in recent months. However we must aim for growth that is sustainable for the long-term, rather than settle for second best.

“With employment and investment intentions at historically high levels, businesses are gearing up for a big year in 2015. It is now vitally important that firms are able to convert their growth ambitions into reality. Strengthening our business finance system, which constrains the growth aspirations of too many firms, will remain a decisive factor in securing a sustainable recovery. Low interest rates and reduced regulation will also go a long way to creating an environment that encourages enterprise and wealth creation.

“In spite of our survey showing an improvement in export balances, the UK’s lacklustre export performance and severely adverse current account balance, continue to act as drag anchors on GDP growth. This need not remain the case – lack of growth finance, patchy help on the ground in overseas markets, and a never-ending churn of short-term support schemes must be addressed without delay.

“The UK’s economic recovery still faces several obstacles, intensified by the uncertainty of the upcoming general election. Businesses are bouncing back, but their optimism may not last if political point scoring outweighs sound economic policies. It is imperative that all political parties use the forthcoming election campaign to outline their plans to support long-term business growth and investment.

“If current and future governments do the right things, there is no reason why the UK should not enjoy sustainable growth driven by re-energised and dynamic businesses. The UK economy is orientated towards the service sector, which is driven principally by people rather than equipment and machinery. The free movement of people in the EU means that capacity is no longer the barrier to growth it once might have been, and upward pressure on wages is much less likely to occur. With no signs of inflation and no upward pressure on wages, there is no justification for an early rise in interest rates.”

David Kern, Chief Economist at the BCC said:

“The latest results support our view that UK growth will stabilise well above 2%, and that Britain’s medium-term economic growth will be slightly higher in the next few years than the recent OBR forecast predicted.

“However, many balances remain below the high levels seen earlier this year, indicating that the overall pace of GDP expansion is easing. In the face of a weak eurozone growth and domestic policies aimed at stabilizing our public finances, a slowdown in economic growth may yet occur in 2015 and 2016, despite increased strength and optimism from businesses.

“Despite a slight improvement at the end of 2014, the current account deficit is unacceptably large. The UK needs a long-term push to rebalance the economy towards net exports and investment, rather than relying too heavily on consumer spending to keep growth going. With inflation likely to stay around 1% for much of the next year, the MPC must delay interest rate rises for the time being.”